Procurement Pulse - May 2017

Procurement Update

Some interesting new developments in procurement law this month. Whilst the case has now been settled and is the subject of an independent enquiry, we report on the Supreme Court's final ruling on the Energy Solutions case, providing procurement professionals with useful guidance and clarifications on key areas of procurement law. We also report on a case which provides further background on the meaning of "legitimate commercial interest", and Advocate General support for the view that an "in-house" subsidiary providing works, services or supplies to its parent without the need for an EU tender process, will fall within the definition of "bodies governed by public law" when carrying out its own purchasing activities. And from Europe, the Economic and Scientific Policy Department in the European Parliament's Directorate General for Internal Policies gives us guidance on potential procurement models post Brexit.

Tactical choices for bidders and contracting authorities in procurement challenges: Issues of interpretation arising out of the Public Contracts Regulations, 2006 ("PCR'06") in the Energy Solutions case were considered by the Supreme Court in April. The Supreme Court held (overturning the Appeal Court's decision) that damages are only payable in connection with "sufficiently serious" breaches of PCR'06, ie domestic UK law does not require payment of damages for any breach of PCR'06 which does not satisfy the Francovich criteria (see April's Procurement Pulse). It also held (confirming the Appeal Court's decision) that economic operators who wish to challenge a breach have the choice (pursuant to PCR'06) as to whether they issue proceedings to suspend the procurement procedure prior to the end of the standstill period, or simply issue a claim for damages post contract award. The issue arises as a result of the difference between the periods set by PCR'06 for the standstill period (ten to fifteen days - during which the contract must not be finalised with the preferred bidder), and the 30 day time limit for aggrieved economic operators to start court proceedings. Lord Mance noted that economic operators who wait for a contracting authority to enter into a contract before issuing a claim could not be said to be acting unreasonably so as to preclude a damages claim (ie by failing to mitigate their loss). Neither would refusing to give an undertaking in damages in order to maintain suspension of a contract award decision (as will generally be required when a request to lift a suspension is made by a contracting authority), be considered to be acting unreasonably. The Supreme Court therefore upheld the Court of Appeal judgment that an award of damages could not be refused on the grounds that an economic operator had not raised its claim before the contract had been award. As an orbiter comment he noted that contracting authorities also had a choice - not to enter into the procured contract until after the 30 day period had expired, to avoid the risk of an economic operator justifiably starting proceedings within the 30 day period, but outside the 10 day standstill period (after which the contracting authority could execute the contract with its preferred bidder). He suggested that contracting authorities may consider that the financial loss of waiting for a 30 day limitation period to elapse before entering into a contract, rather than doing so immediately after the standstill period may be worth bearing, when balanced against the risk of wrongfully awarding a contract which is then successfully challenged. "The delayed entry into the contract could involve the contracting authority in some loss, over and above that due to the minimum ten day standstill …. In the event that the contract award decision proved not to have involved any infringement, the contracting authority would have to bear that loss, without any recourse. But some loss of this sort could anyway result under the scheme from the ten day standstill period (and from the period which might elapse between the imposition of any stop and its discharge, in a case where the Court did not see fit to continue the stop by requiring an undertaking or security). The loss would on any view be unlikely to be anything approaching that which would arise from entering into the contract with one economic operator and being held liable to another for having wrongly done so."

"Proxy" entities and "bodies governed by public law": The concept of bodies governed by public law is notoriously difficult to interpret. This case looked at a "proxy" entity (VLRD) which was wholly owned by, and originally set up to manufacture and maintain rolling stock for the Lithuanian State Railway Company (LG - a rail transport network operator, and therefore a contracting authority pursuant to Directive 2004/17/EC). VLRD procured metal bars following its internal procurement protocol. LitSpecMet was awarded part of the contract. LitSpecMet sought to have the procedure declared invalid, and argued that VLRD should start a new procedure following Lithuanian law implementing Directive 2004/18/EC. The ECJ concurred that manufacture of rolling stock does not consist of the "provision or operation of networks providing a service to the public in the field of transport by railway" and therefore the case should be considered in the context of 2004/18, not Directive 2004/17/EC. Around 90% of LG's revenue came from transactions with its parent, LG. The metal bars were to be used for the manufacture of equipment ordered by LG pursuant to those "in-house" arrangements. Whilst the EU Commission argued that an entity was not a "contracting authority", simply because it satisfied the control tests for the "in-house" exception in Directive 2004/18/EC, the ECJ considered that whilst that might be the case in relation to "marginal" activities (where the controlled entity competed in the market) it was not the case for "essential" tasks which have been specifically entrusted to it in its capacity as an "£in-house" entity by the contracting authority - "Where in order to carry out those tasks the undertaking (VLRD in this case) needs to obtain goods, services and supplies from a third party to a value which exceeds the level for harmonised procurement, then the public procurement directives apply". A company such as VLRD "meets needs that are inherently in the general, non-industrial or commercial interest, since it must be concluded that VLRD does this insofar as it is functionally part of a company (LG) which meets this type of need and on behalf of which it acts under the in-house system."

"Legitimate commercial interest": This case interprets provisions of the Environmental Information Regulations, 2000 (EIR), but is of interest by way of analogy in a contentious procurement scenario, where a procuring authority must debrief bidders during the statutory standstill period. At that time, a procuring authority may withhold information which "would prejudice the legitimate commercial interests of a particular economic operator", but there is little case law on the meaning of the words "legitimate commercial interests". The Worcester case provides guidance in a waste management services context, as a result of a member of the public requesting copies of a variation to a waste management service contract. Worcester CC (WCC) disclosed the document, but with considerable redaction. In considering the exception at EIR regulation 12(5)(e) - "disclosure adversely affecting confidentiality provided by law to protect a legitimate commercial interest" - the Information Tribunal confirmed that information must be of such significance that economic loss would be suffered by its disclosure. In the context of each item of information which Worcester CC wished to redact, the Tribunal therefore asked:

What is the economic interest which would be protected by maintaining its confidentiality?

What damage would be caused to that interest, were disclosure to be ordered?

When "viewed as a whole", the Tribunal agreed that issues going beyond financial information, such as lists of plant, contractual performance mechanisms, key sub-contracts and compensation on termination formulae would harm the economic interests of Mercia if disclosed, and that the public interest in maintaining such commercial confidences, outweighed the public interest in transparency and accountability of public spending.

Directorate General for Internal Policies: Consequences of Brexit in the area of public procurement - April 2017: Public procurement affects a substantial proportion of world trade, and offers significant opportunities. When negotiating any trade agreement with non-EU countries, the EU wishes economic entities within its member states to be given the same opportunities in public procurements as local entities. It therefore requires provisions in each trade agreement which specify which procurements are covered, prohibit discrimination against EU member state entities, require clear specifications and impartial award criteria and provide remedies to facilitate enforcement of the trade agreement rules. How will these issues be provided for between the EU and the UK post Brexit? This paper outlines four possible approaches:

The EEA Agreement model: Assuming that the UK became part of the European Economic Area (or entered into a separate agreement following the EEA approach), the current EU procurement directives (and rules for below threshold contracts with cross border interest) would apply in the same way as if the UK were still an EU member state.

The GPA model: The UK is already party to the Government Procurement Agreement as a result of its membership of the EU. Whether it would be required to re-apply as an individual entity is a moot point. The scope of UK public procurement contracts regulated under the GPA, is narrower than those regulated under the EU procurement directives. The GPA is also comparatively deficient in other areas, for example below threshold contracts are not covered, there are no rules regarding modification of existing contracts and GPA remedies are less stringent.

EEA-minus model: a DCFTA (Deep and Comprehensive Free Trade Agreement) might include a procurement element based on the EU procurement acquis, but not including all the procurement related elements found in the EEA Agreement eg regulation of below threshold agreements.

GPA-plus model: UK access to EU public procurement markets would be based on the GPA, supplemented by additional rules from the procurement acquis.

The paper also outlines transitional issues relating to procurement which may need to be covered in any UK/EU withdrawal agreement.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

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